PBOC, ECB exchange digital currency views

Central bank head tells event global monetary ties can help defuse risks

The People's Bank of China, the central bank, and the European Central Bank are having "regular technical exchanges" on aspects like design, applications and use of central bank digital currencies or CBDCs.

Yi Gang, governor of the PBOC, said PBOC-ECB communications signify progress toward exploring the use of CBDCs in cross-border payments. They are part of efforts to promote the development of the international monetary system.

Yi made the remarks in his address to the 30th Anniversary Conference of the Bank of Finland Institute for Emerging Economics. "We would like to strengthen cooperation with other central banks and international organizations on CBDCs."

The PBOC published a copy of his speech on its website on Wednesday. Analysts immediately reviewed the document and said the PBOC-ECB communications signal that the monetary authorities of China and the European Union may deepen their cooperation to set up systems for their respective CBDCs.

The larger goal is to use CBDCs to defuse potential risks that may arise from various privately developed cryptocurrencies such as Bitcoin, analysts said.

In his speech, Yi said the PBOC is also building a management model for the digital RMB, or e-CNY, with reference to the management of cash and bank accounts. It will increase interoperability with the existing electronic payment tools, and improve the e-CNY ecosystem.

An executive of the ECB said on Friday that central banks have to prepare for a digital future and the digitalization trend requires CBDCs as a complement to cash, foreign media reported.

It is similar to Chinese monetary authorities' view that the role of the e-CNY is to replace some cash in circulation, which bears no interest, to reduce competition with commercial banks for deposits.

In addition, designers of the e-CNY have introduced the upper limit for digital money transfer through digital wallets to minimize the risk of bank runs, Yi said. During the trials, the PBOC also aims to test the e-CNY's impact on monetary policy and financial stability.

Cross-border use of CBDC is much more complicated. But the PBOC never stops exploring this area, and it has jointly launched the multilateral CBDC bridge project－mBridge－with its counterparts or peers such as the Bank for International Settlements, the Bank of Thailand and the Central Bank of the United Arab Emirates.

Under the mBridge project, a case from Bank of China indicated that the efficiency of cross-border trade settlements can be enhanced when transactions are between mBridge and two interconnected cross-border digital trade instrument platforms. The latter are both blockchain-based trade finance platforms, according to a brochure from the PBOC's Digital Currency Institute.

It indicated that the PBOC Trade Finance Platform is managed by a subsidiary of the PBOC Institute of Digital Currency, which is financial infrastructure that provides public services in trade finance.

The platform has facilitated a number of businesses, including multilevel receivable financing in the supply chain sector, cross-border financing, international trade remittance supervision, and tax reporting on outward payments, the brochure stated.

"Cross-border use of CBDCs involves more complicated issues, such as anti-money laundering measures and customer due diligence. Therefore, the e-CNY focuses on domestic retail payments at this stage," said Yi.

Mu Changchun, director-general of the PBOC's Digital Currency Institute, said that as of Oct 22, 140 million individual wallets and 10 million corporate wallets have been created, with volume totaling 150 million transactions with a value of about 62 billion yuan ($9.7 billion).

Yi also said mobile payment services, which grew 25 percent last year in China, are mainly provided by the private sector. "That is brewing risks of market fragmentation and privacy infringement."

In comparison, CBDCs allow central banks to continue to provide a credible and secure means of payments in the digital era, which can improve efficiency and integrity of the payment system, Yi said.